Steve writes editorials for each issue of Forbes under the heading of “Fact and Comment.” A widely respected economic prognosticator, he is the only writer to have won the highly prestigious Crystal Owl Award four times. The prize was formerly given by U.S. Steel Corporation to the financial journalist whose economic forecasts for the coming year proved most accurate.

In both 1996 and 2000, Steve campaigned vigorously for the Republican nomination for the Presidency. Key to his platform were a flat tax, medical savings accounts, a new Social Security system for working Americans, parental choice of schools for their children, term limits and a strong national defense. Steve continues to energetically promote this agenda.

Have Today's Economic Big Shots Gone Mad?

A Page One news story in Friday’s Wall Street Journal graphically displays the economic ignorance plaguing the world today. The story is about Europe’s pitiful economic performance and how, instead of improving, things look to be faltering again. That is indeed bad news, following the recent euro currency crisis. But the source of concern, as stated in the opening paragraph, is bizarre: “Too little inflation will threaten Europe’s fragile recovery.” The story goes on to say, “The latest numbers signal that dangerously low inflation—which Japan struggled with for two decades and the U.S. central bank has labored in recent years to avoid—has arrived at Europe’s front door.”

Low inflation is now on a par with wolves at the door or the bubonic plague.

Obviously, despite the experience of history, financial experts today believe that debauching currencies creates sound and sustainable growth. Here on display is the bankruptcy of modern economic thought.

Facts are conveniently ignored.

No country has experienced strong, long-term economic growth while its currency has been weak. Compare the U.S. in the 1970s with the U.S. in 1980s and 1990s. The 1970s were a time of high inflation and economic stagnation, a decade of malaise, during which nothing seemed to go right. A demoralized U.S. was bad news for the world, as anti-Western, antidemocratic forces grew in size, strength and prominence.

In retrospect, it’s astonishing that the Soviet Union was seen as the ascending power with an ever stronger military, while a declining U.S. was crippled by incompetence (remember the botched rescue of American hostages in Iran) and self-doubt.

The single biggest precipitator of our woes was President Nixon’s 1971 decision to sever the dollar’s link to gold. Domestic and global economic chaos ensued, which anyone perusing a history of such acts could have predicted. But the superstitions of Keynesian economics trumped real-world experience.

Ronald Reagan’s major fiscal and monetary reforms, along with his commonsense, muscular defense and foreign policies, dramatically reversed U.S. fortunes. American monetary policy remained wobbly—we didn’t return to a gold standard—but compared with recent years it was rather stable. As sensible economic policies were pursued, the U.S. and global economies roared ahead. Inflation came to be regarded as the disease it is. But like movie monsters that don’t stay dead, no matter how many times they’re slain, the idea that a little inflation is good for growth seeped back in. This sick notion is epitomized by the Phillips curve, named after a New Zealand economist who posited that if you want low unemployment, you must generate some inflation and, conversely, if you want to reduce inflation, you must engineer higher levels of unemployment.

The Phillips curve has been refuted in countless studies over the years, including a number conducted by Nobel prize-winning economists. No matter. As the WSJ article made clear, it is today’s dogma.

John Maynard Keynes rightly labeled inflation as a form of taxation, a particularly invidious one. It arbitrarily produces winners and losers, with no concern for effort and reward or for meeting the needs and wants of customers. It rewards speculation rather than the traditional ways of getting ahead, such as hard work, saving and innovating, thereby undermining social trust and demoralizing a society.

Nevertheless, central bankers such as Ben Bernanke and his putative successor Janet Yellin claim we need some inflation, preferably an annual rate of 2% to 2.5%. That level would cost a family making $40,000 annually an extra $800 to $1,000 a year in higher prices. If you ever run across a central banker or an economist who shares this weird view, ask that person what elected body gave the Fed—or any other central bank—the authority to impose such a tax.

In the early part of the last decade the Federal Reserve and the U.S. Treasury Department instituted a weak-dollar policy that led to the housing bubble, the boom in commodities, the inflation in farmland prices, hot-house growth in the financial sector and a bubble in bonds—and, perhaps, stocks. But just as many doctors in the mid-19th century fiercely resisted Lister’s germ theory by refusing to wash their hands before surgeries, these policymakers remain wedded to their destructive theories.

The recipe for sustained prosperity is simple: stable money, low tax rates and reasonable rules and regulations, a.k.a. the rule of law. Money is simply a measure of value, just as inches and minutes are measures of length and time. Money facilitates transactions—buying and selling—between willing parties. Fooling around with money is like fooling around with weights and measures. It harms commerce—and much else.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.